'Cliff' Deal Would End Payroll Tax Holiday

In covering this debate, much has been made of income tax rates and where exactly they should be raised. But one fact has gotten far less notice. Starting today, payroll taxes are going up two percentage points for nearly all American workers. NPR's John Ydstie joins us to talk about it. And John, this means lower take-home pay for a lot of workers starting very soon.

JOHN YDSTIE, BYLINE: That's right, Audie. If you're not getting a raise this year, your paycheck's not just going to stay the same, it's actually going to be a little smaller in 2013 and that's because for about two years now, the government has been collecting 2 percentage points less from you to fund Social Security. But that tax holiday expired at midnight last night, so in 2013, you once again will be paying 6.2 percent of your salary for the Social Security payroll tax.

And that, you know, really adds up to real money. Let's say you make a relatively modest income of about $30,000 a year. Your annual take-home pay will be $600 less as a result of this expiration. Or take a couple and say they each make at least $113,000 a year, that's the top amount subject to Social Security taxes. Their take-home pay would be $4500 less.

In fact, on average, workers will get around $960 less in take-home pay because the payroll tax holiday hasn't been extended.

CORNISH: But the idea behind the payroll tax holiday was to stimulate the economy. And by that measure, did it work?

YDSTIE: Yeah. I think most economists would agree it did. It was enacted in late 2010 when unemployment was very high and it raised take-home pay by around $100 billion a year. The economic research firm, Moody's Analytics, says for every dollar workers were able to keep in their pockets, $1.27 was added to U.S. GDP as the money circulated through the economy.

So it undoubtedly played a role in helping support growth in the last two years. Now, it wasn't the best way to stimulate the economy because it put money in the pockets of a lot of well-off people, many of whom saved it, didn't spend it. Ironically, it actually replaced a more stimulative tax break called the Making Work Pay tax cut, which targeted lower income people who would be more likely to spend it, providing more fuel for the economy.

But that tax cut was initiated by President Obama and Republicans wouldn't renew it back in 2010, but they did go along with this payroll tax break.

CORNISH: So help us understand, if most economists agree the payroll tax holiday has actually helped the economy, isn't allowing it to expire going to hurt the economy when the government starts taking this money out of people's pockets again?

YDSTIE: You're right. It very likely will hurt the economy. Economists say it could trim more than a half a percentage point off of growth in 2013. And when you're only growing in the range of around 2 percent or a little more than that a year, that's significant.

CORNISH: John, unemployment is still over 7.5 percent, why pull the plug on the payroll tax holiday now?

YDSTIE: Well, President Obama did propose extending it in his first offer during negotiations with House Speaker Boehner a couple weeks ago. But it came off the table relatively quickly. One reason is that it's adding to the deficit, which makes Republicans nervous. Also, some Democrats think the payroll tax holiday could undermine the Social Security system. Up to now, the government has been transferring money from its big general fund to the Social Security trust fund to make up for the money being lost to the tax break.

But these Democrats fear that could end some day and weaken the program.